Global Market Comments
March 27, 2018
Fiat Lux
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Global Market Comments
March 23, 2018
Fiat Lux
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Global Market Comments
March 22, 2018
Fiat Lux
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When I was a little kid in the early 1950s, my grandfather used to endlessly rail against Franklin Delano Roosevelt. The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died-in-the-wool Republican, said the former president was a dictator and a traitor to his class who trampled the constitution with complete disregard. Candidates Hoover, Landon, and Dewey would have done much better jobs.
What was worse, FDR had run up such enormous debts during the Great Depression that, not only would my life be ruined, so would my children's lives. As a six year old, this disturbed me deeply, as it appeared that just out of diapers, my life was already pointless.
Grandpa continued his ranting until three packs a day of unfiltered Lucky Strikes finally killed him in 1977. He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer, even though during to war they were referred to as ?coffin nails?.
What my grandfather?s comments did do was spark in me a permanent interest in the government bond market, not only ours, but everyone else?s around the world.
So, whatever happened to the despised, future ending Roosevelt debt? In short, it went to money heaven.
I like to use old movies as examples. Remember, when someone walked into a diner in those old black and white flicks? The prices on the wall menu? said: ?Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.?
That is where the Roosevelt debt went. By the time the 20 and 30-year Treasury bonds issued in the 1930s came due, WWII, Korea, and Vietnam happened, along with the great inflation that followed.
The purchasing power of the dollar cratered, falling roughly 90%, Coffee was now $1.00, a hamburger $2.00, and a cheap steak at Outback cost $10.00. The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.
Who paid for this free lunch? Bond owners, who received minimal and, often, negative real inflation adjusted returns on fixed income investments for three decades.
In the end, it was the risk avoiders who picked up the tab. This is why bonds were known as ?certificates of confiscation? during the seventies.
This is not a new thing. About 300 years ago, governments figured out there was easy money to be made by issuing paper money, borrowing massively, stimulating the local economy, and then repaying the debt in devalued future currencies.
This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.
Ever wonder how the new, impoverished United States paid for the Revolutionary War? It issued paper money by the bale, which dropped in purchasing power by two thirds by the end of the conflict in 1783. The British helped too by flooding the country with counterfeit paper money.
The really fascinating thing about financial markets so far this year is that I see history repeating itself. Owners of bonds had a great start, but I think the worm has turned.
I agree with bond maven, Geoffrey Gundlach, that bonds peaked in both the US and Europe last week, and that we are eventually heading back to a 2.75%-3.0% yield on the ten-year Treasury bond. Geoffrey has been long bonds until now.
Sell every rally for the rest of the year.
Bondholders can expect to receive a long series of rude awakenings when they get their monthly statements. No wonder Bill Gross, the former head of bond giant, PIMCO, says he expects to get ashes in his stocking for Christmas this year.
The scary thing is that we could be only two years into a new 30-year bear market for bonds that lasts all the way until 2042.
This is certainly what the demographics are saying, which predict an inflationary blow off in decades to come that could take short-term Treasury yields to a nosebleed 12% once more.
That scenario has the leveraged short Treasury bond ETF (TBT), which has recently leapt from $31 to $43, soaring all the way to $200.
If you wonder how yields could get that high in a decade, consider one important fact. The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 12% of the total outstanding.
Unfortunately, both countries have already entered very negative demographic pyramids, which will forestall any future large purchases of foreign bonds. They are going to need the money at home to care for burgeoning populations of old age pensioners.
So, who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI.
Check out the chart below, and it is clear that the downtrend in long term Treasury bond yields going all the way back to April, 2011 is broken, and that we are now heading substantially up.
The old resistance level at 2.40% will become the new support. That targets a new range for bonds of 2.40%-2.90%, possibly for the rest of 2016.
There is a lesson to be learned today from the demise of the Roosevelt debt. It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra low interest rates and spending it all.
With inflation at nil, they have a free pass to do so. In effect, it never has to pay it back, but enables us to reap immediate benefits. My friend, Fed Reserve Chairwoman, Janet Yellen, certainly thinks so.
If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny would go to new social programs. Long-term capital investments should be the sole target. Here is my shopping list:
$1 trillion ? new Interstate freeway system
$1 trillion ? additional infrastructure repairs and maintenance
$1 trillion ? conversion of our transportation system to natural gas
$1 trillion ? construction of a rural broadband network
$1 trillion ? investment in R&D for everything
The projects above would create 5 million new jobs quickly.
Who would pay for all of this? Today?s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese.
How did my life turn out? Was it ruined, as my grandfather predicted? Actually, I've done pretty well for myself, as did the rest of my generation, the baby boomers. My kids are doing OK too.
Grandpa was always a better historian than a forecaster. But he did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows borrowing binges.
I had the great pleasure of having breakfast the other morning with my long time friend, Mohamed El-Erian, former co-CEO of the bond giant, PIMCO.
Mohamed argues that there has been a major loss of liquidity in the financial markets in recent decades that will eventually come home to haunt us all.
The result will be a structural increase in market volatility, and wild gyrations in the prices of financial assets that will become commonplace.
We have already seen a few of these in recent weeks. German ten-year bund yields jumped from 0.01% to 0.20% in a mere two weeks, a gap once thought unimaginable. The Euro has popped from $1.08 to $1.03.
Since July, we have watched in awe as the ten-year Treasury yield ratcheted up from 1.23% to 2.40%.
The worst is yet to come.
It is a problem that has been evolving for years.
When I started on Wall Street during the early 1980s, the model was very simple. You have a few big brokers servicing millions of small individual customers at fixed, non-negotiable commissions.
The big houses made so much money they could spend some money facilitating counter cycle customers trades. This means they would step up to bid in falling markets, and make offers in rising ones.
In any case, volatility was so low then that this never cost all that much, except on those rare occasions, such as the 1987 crash (we lost $75 million in a day! Ouch!).
Competitive, meaning falling, commissions rates wiped out this business model. There were no longer the profits to subsidize losses on the trading side, so the large firms quit risking their capital to help out customers altogether.
Now you have a larger numbers of brokers selling to a greatly shrunken number of end buyers, as financial assets in the US have become concentrated at the top.
Assets have also become institutionalized as they are piled into big hedge funds, and a handful of big index mutual funds, and ETFs. These assets are managed by people who are also much smarter too.
The small, individual investor on which the industry was originally built has almost become an extinct species.
There is no more ?dumb money? left in the market.
Now those placing large orders are at the complete mercy of the market, often with egregious results.
Enter volatility. Lots of it.
What is particularly disturbing is that the disappearance of liquidity is coming now, just as the 35 year bull market in bonds is ending.
An entire generation of bond fund managers, and almost two generations of investors, have only seen prices rise, save for the occasional hickey that never lasted for more than a few months. They have no idea how to manage risk on the downside whatsoever.
I am willing to bet money that you or your clients have at least some, if not a lot of your/their? money tied up in precisely these funds. All I can say is, ?Watch out below.?
When the flash fire hits the movie theater, you are unlikely to be the one guy who finds the exit.
We're hearing a lot about when the Federal Reserve finally gets around to raising interest rates next month that it will make no difference, as rates are coming off such a low base.
You know what? It may make a difference, possibly a big one.
This is because it will signify a major trend change, the first one for fixed income in more than three decades. That?s all most of these guys really understand are trends, and the next one will have a big fat ?SELL? pasted on it for the fixed income world.
El-Erian has one of the best 90,000-foot views out there. A US citizen with an Egyptian father, he started out life at the old Salomon Smith Barney in London and went on to spend 15 years at the International Monetary Fund.
He joined PIMCO in 1999, and then moved on to manage the Harvard endowment fund. His book, When Markets Collide, was voted by The Economist magazine as the best business book of 2008.
He regularly makes the list of the world?s top thinkers. A lightweight Mohamed is not.
His final piece of advice? Engage in ?constructive paranoia? and structure your portfolio to take advantage of these changes, rather than fall victim to them.
I have never been one to run with the pack.
I'm the guy who eternally marches to a different drummer, not in the next town, but the other hemisphere.
I would never want to join a club that would lower its standards so far that it would invite me as a member.
On those rare times when I do join the lemmings, I am punished severely.
Like everyone and his brother, his fraternity mate, and his long lost cousin, I thought bonds would fall this year and interest rates would rise.
After all, this is normally what you get in the seventh year of an economic recovery. This is usually when corporate America starts to expand capacity and borrow money with both hands, driving rates up.
Although I was wrong on the market direction, Treasury bonds have been one of my top performing asset classes this year. I used every spike in prices to buy (TLT) vertical put spreads $3-$5 in the money, and raked in profits almost every month.
Of course, looking back with laser-sharp 20/20 hindsight, it is so clear why fixed income securities of every description have been on a tear all year.
I will give you ten reasons why bonds won't crash. In fact, they may not reach a 3% yield for at least another five years.
?
1) The Federal Reserve is pushing on a string, attempting to force companies to increase hiring, keeping interest rates at artificially low levels.
My theory on why this isn?t working is that companies have become so efficient, thanks to hyper accelerating technology, that they don?t need humans anymore. They also don?t need to add capacity.
?2) The US Treasury wants low rates to finance America?s massive $19 trillion national debt. Move rates from 0% to 6% and you have an instant financial crisis.
3) With Japan and Europe in a currency price war and a race to the bottom, the world is sending its money to the US to chase higher interest rates. An appreciating greenback which is now at close to a five-year peak is also funneling more money into bonds.
The choices for ten-year government bonds are Japan at 0.4%, Germany at 0.0%,?Switzerland at a negative -0.48% and the US at 1.65%. It all makes our bonds look like a screaming bargain.
4) Since the 2009 peak, the US budget deficit has fallen the fastest in history, down 75% from $1.6 trillion to a mere $400 billion, and lower numbers beckon.
Obama?s tax hikes did a lot to shore up the nation?s balance sheet. A growing economy also throws off a ton more in tax revenues. As a result, the Treasury is issuing far fewer bonds, creating a shortage.
5) This recovery has been led by small ticket auto purchases, not big ticket home purchases. The last real estate crash is still too recent a memory for many traumatized buyers, at least for those few who can get a mortgage. This keeps loan demand weak, and interest rates at subterranean levels.
6) The Fed?s policy of using asset price inflation to spur the economy has been wildly successful. Bonds are included in these assets, and they have benefited the most.
7) New rules imposed by Dodd-Frank force institutional investors to hold much larger amounts of bonds than in the past.
8) The concentration of wealth with the top 1% also generates more bond purchases. It seems that once you become a billionaire, you become ultra conservative and only invest in safe fixed income products.
This is happening globally. For more on this, click here for ?The 1% and the Bond Market?.
9) Inflation? Come again? What?s that? Commodity, energy, precious metal, and food prices are disappearing up their own exhaust pipes. Industrial revolutions produce deflationary centuries, and we have just entered the third one in history (after no. 1, steam, and no. 2, electricity).
10) The psychological effects of the 2008-2009 crash were so frightening that many investors will never recover. That means more bond buying and less buying of all other assets. I can?t tell you how many investment advisors I know who have converted their practices to bond only ones.
Having said all of that, I am selling bonds short once again on the next substantial rally. Call me an ornery, stubborn, stupid old man.
But hey, even a blind squirrel finds an acorn sometimes.
Am I Stubborn or Just Plain Stupid?
Ignore the lessons of history, and the cost to your portfolio will be great. Especially if you are a bond trader!
In Britain they celebrated something unusual last year. The government reported the first year on year decline in consumer prices in 54 years (see chart below).
In fact, prices for the things they buy day to day were 0.1% lower than they were 12 months before.
Meet deflation, up front and ugly.
If you looked at a chart for data from the United States, they would not be much different, where consumer prices are showing a feeble 0.4% YOY price gain. This is miles away from the Federal Reserve?s own 2% annual inflation target.
We are not just having a deflationary year or decade. We may be having a deflationary century.
If so, it will not be the first one.
The 19th century saw continuously falling prices as well. Read the financial history of the United States, and it is beset with continuous stock market crashes, economic crisis, and liquidity shortages.
The union movement sprung largely from the need to put a break on falling wages created by perennial labor oversupply and sub living wages.
Enjoy riding the New York subway? Workers paid 10 cents an hour built it 120 years ago. It couldn?t be constructed today, as other more modern cities have discovered. The cost would be wildly prohibitive.
The causes of 19th century price collapse were easy to discern. A technology boom sparked an industrial revolution that reduced the labor content of end products by ten to hundredfold.
Instead of employing a 100 women for a day to make 100 spools of thread, a single man operating a machine could do the job in an hour.
The dramatic productivity gains swept through then developing economies like a hurricane. The jump from steam to electric power during the last quarter of the century took manufacturing gains a quantum leap forward.
If any of this sounds familiar, it is because we are now seeing a repeat of the exact same impact of accelerating technology. Machines and software are replacing human workers faster than their ability to retrain for new professions.
This is why there has been no net gain in middle class wages for the past 30 years. It is the cause of the structural high U-6 ?discouraged workers? employment rate, as well as the millions of millennials still living in parents? basements.
Instead of steam and electric power, it is now the internet, cheap computing power, global broadband, and software that is swelling the ranks of the jobless.
What?s more, technology gains are now going hyperbolic to a degree never seen before in civilization.
To the above add the huge advances now being made in healthcare, biotechnology, genetic engineering, DNA based computing, and big data solutions to problems.
If all the diseases in the world were wiped out, a probability within 30 years, how many jobs would that destroy?
Probably tens of millions.
So the deflation that we have been suffering in recent years isn?t likely to end any time soon. In fact, it is just getting started.
Why am I interested in this issue? Of course, I always enjoy analyzing and predicting the far future, using the unfolding of the last half century as my guide. Then I have to live long enough to see if I?m right.
I did nail the rise of eight track tapes over six track ones, the victory of VHS over Betamax, the ascendance of Microsoft operating systems over OS2, and then the conquest of Apple over Microsoft. So I have a pretty good track record on this front.
For bond traders especially, there are far reaching consequences of a deflationary century. It means that there will be no bond market crash, as many are predicting, just a slow grind up in long term interest rates instead.
Amazingly the top in rates in the coming cycle may only reach the bottom of past cycles, around 3% for ten-year Treasury bonds (TLT), (TBT).
The soonest that we could possibly see real wage rises will be when a generational demographic labor shortage kicks in during the 2020?s. That could be a decade off.
I say this not as a casual observer, but as a trader who is constantly active in an entire range of debt instruments.
So the bottom line here is that there is additional room for bond prices to fall and yields to rise. But not by that much, given historical comparisons. Think of singles, not home runs.
It really will be just a trade. Thought you?d like to know.
Try This at Your Peril
The market has been chattering quite a lot about the massive downside bets on the S&P 500 being placed by some of the industry?s best known players.
That is something I would expect from my long time client and mentor George Soros.
But Warren Buffett as well? He is one of the greatest long term, pro America bulls out there.
It is the sort of news that gives investors that queasy, seasick feeling in the pit of their stomachs. You know, like when a new Tesla owner shows off his warp speed ?ludicrous mode??
That is unless you are running heavy short positions in stocks, as I am.
Every technical analyst in the world is pouring over their charts and coming to the same conclusion. A ?Head and Shoulders? pattern is setting up for the major indexes, especially for the S&P 500 (SPY).
And if you think the (SPY) chart is bad, those for the NASDAQ (QQQ), and the Russell 2000 (IWM), look much worse.
This is terrible news for stock investors, as well as owners of other risk assets like commodities, oil and real estate. It is wonderful news for those long of Treasury bonds (TLT), the Euro (FXE), gold (GLD), and silver (SLV).
A head and shoulders pattern is one of the most negative textbook indicators out there for financial markets. It means that there is only enough cash coming in to take prices up to the left shoulder, but no higher.
There is not even enough to challenge the old high, taking a double top decidedly off the table.
The bottom line: the market has run out of buyers. Be very careful of markets where everyone is bullish long term, but no one is doing any buying.
When the hot, fast money players see momentum rapidly fading, they pick up their marbles and go home. Some of the most aggressive, like me, even flip to the short side and make money in the falling market.
If we make it down to the ?neckline? and it doesn?t hold, then the sushi really hits the fan. Right now, that neckline is at $204.60 in the S&P 500 (SPY). Break that, and it?s hasta la vista baby. See you later.
Stop losses get triggered, the machines takeover, and shares move to the downside with a turbocharger. Distress margin calls on the most levered players (usually the youngest ones) add further fuel to the fire. We might even get a flash crash
This is when the really big money is made on the short side.
There is a new wrinkle this year that could make this sell off particularly vicious. To see a formation like this setting up during May is particularly ominous. It means that ?Sell in May? is going to work one more time
?It?s not like we have any shortage of bearish headlines to prompt a stampede by the bears.
The turmoil in Europe, one of the largest buyers of American exports, could cause the US to catch a cold. This is what the latest round of earnings disappointments has been hinting at.
Margin debt to own stocks has recently exploded to an all time high.
It could well be that the market action is just the dress rehearsal for a deeper correction in the summer, when markets are supposed to go down.
If markets do breakdown, it won?t be bombs away. The (SPY) might make it down to $181, $177, or in an extreme case $174. But to get sustainably below that, we really need to see an actual recession, not just a growth scare.
Remember that earnings are still growing year on year, once you take out the oil industry. That is not a formula for any kind of recession.
It is a formula for a 10% sell off in an aged bull market. That?s where you load the boat with the best quality stocks (MSFT), (FB), (GOOG), (CELG), etc., which should be down 25-35%, and then clock your +25% year in your equity trading portfolio.
If you are NOT a trader, but a long-term investor monitoring you retirement funds, just go take a round-the-world cruise and wake me up on December 31. You should be up 5% or more, with dividends, and skip the volatility.
Ignore It at Your Peril
Volatility? What Volatility?
I have been to Greece many times over the past 45 years, and I?ll tell you that I just love the place. The beaches are perfect, the Ouzo wine enticing, and I?ll never say ?No? to a good moussaka.
However, I don?t let Greece dictate my investment strategy.
Greece, in fact, accounts for less than 2% of Europe?s GDP. It is not a storm in a teacup that is going on there, but a storm in a thimble. Greece is really just a full employment contract for financial journalists, who like to throw around big words like bankruptcy, default and contagion.
I have other things to worry about.
In fact, I am starting to come around to the belief that Europe is looking pretty good right here. Cisco (CSCO) CEO, John Chambers, announced that he was seeing the early signs of a turnaround.
Fiat CEO, Sergio Marchionne, the brilliant personal savior of Chrysler during the crash, thinks the beleaguered continent is about to recover from ?hell? to only ?purgatory.?
Only a devout Catholic could come up with such a characterization. But I love Sergio nevertheless because he generously helps me with my Italian pronunciation when we speak (aspirapolvere for vacuum cleaner, really?).
What are the two best performing stock markets since the big ?RISK ON? move started last Thursday? Greece (GREK) (+5%) and Russia (RSX) (+7.5%)!
And here is where I come in with my own 30,000 foot view.
The undisputed lesson of the past five years is that you always want to own stock markets that are about to receive an overdose of quantitative easing.
Since the US Federal Reserve launched their aggressive monetary policy, the S&P 500 (SPY) nearly tripled off the bottom.? Look how well US markets have performed since American QE ended 18 months ago.
Europe has only just barely started QE, and it could run for five more years. Corporations across the pond are about to be force-fed mountains of cash at negative interest rates, much like a goose being fattened for a fine dish of foie gras (only decriminalized in California last year).
Mind you, it could be another year before we get another dose of Euro QE, which is why I just bought the Euro (FXE) for a short-term trade.
A cheaper currency automatically reduces the prices of continental exports, making them more competitive in the international markets, and boosting their economies. Needless to say, this is all great new for stock markets.
Get Europe off the mat, and you can also add 10% to US share prices as well, as the global economy revives. The Euro drag dies and goes to heaven.
Buy the Wisdom Tree International Hedged Equity Fund ETF (HEDJ) down here on dips, which is long a basket of European stocks and short the Euro (FXE). This could be the big performer this year.
Praise the Lord and pass the foie gras!
Those of a certain age can?t help but remember that things for the US went to hell in a hand basket after 1963.
That?s when President John F. Kennedy was assassinated, heralding decades of turmoil. Race riots exploded everywhere. The Vietnam War ramped up out of control, taking 60,000 lives, and destroying the nation?s finances. Nixon took the US off the gold standard.
When people complain about our challenges now, I laugh to my self and think this is nothing compared to that unfortunate decade.
Two oil shocks and hyper inflation followed. We reached a low point when Revolutionary Guards seized American hostages in Tehran in 1979.
We received a respite after 1982 with the rollback of a century?s worth of regulation during the Reagan years. But a borrowing binge sent the national debt soaring, from $1 trillion to $18 trillion. An 18-year bull market in stocks ensued. The United States share of global GDP continued to fade.
Basking in the decisive victories of WWII, the Greatest Generation saw their country account for 50% of global GDP, the largest in history, except, perhaps, for the Roman Empire. After that, our share of global business activity began a long steady decline. Today, we are hovering around 22%.
Hitch hiking around Europe in 1968 and 1969 with a backpack and a dog-eared copy of Europe on $5 a Day, I traded in a dollar for five French francs, four Deutschmarks, three Swiss francs, and 0.40 British pounds.
When I first landed in Japan in 1974, there were Y305 yen to the dollar. Even after a strong year, the greenback is still down by 75% against these currencies, except for sterling. How things have changed.
We now live in a world where the US suddenly has the strongest economy, currency and stock market in the world. Are these leading indicators of better things to come?
Is the Great American Rot finally ending? Is everything that has gone wrong with the United States over the past half century reversing?
The national finances are hinting as much. Over the last four years, the federal budget deficit has been shrinking at the fastest rate in history, from $1.4 trillion to only $483 million.
If the economy continues to grow at its present modest 2.5% rate, we should be in balance by 2018. Then the national debt, which will peak at around $18 trillion, will start to shrink for the first time in 20 years.
And since chronic deflation has crashed borrowing costs precipitously, the cost of maintaining this debt has dramatically declined.
A country with high economic growth, no inflation, generationally low energy costs, a strong currency, overwhelming technology superiority, a strong military and political stability is always a fantastic investment opportunity.
It certainly is compared to the highly deflationary, weak currency, technologically lagging major economies abroad.
You spend a lifetime looking for these as a researcher, and only come up with a handful. Perhaps this is what financial markets have been trying to tell us all along.
It certainly is what foreign investors have been telling us for years, who have been moving capital into the US as fast as they can (click here for ?The New Offshore Center: America?).
It gets even better. These ideal conditions are only the lead up to my roaring twenties scenario (click here for ?Get Ready for the Coming Golden Age?), when over saving, under consuming baby boomers enter a mass extinction, and a gale force demographic headwind veers to a tailwind.
That opens the way for the country to return to a consistent 4% GDP growth, with modest inflation and higher interest rates.
Which leads us all to the great screaming question of the moment: Why is the US stock market trading so poorly this year? If the long term prospects for companies are so great, why have shares suddenly started performing feebly?
Not only has it gone nowhere for three months, market volatility has doubled, making life for all of us dull, mean and brutish.
There are a few short-term answers to this conundrum.
There is no doubt that the Euro and the yen have fallen so sharply against the greenback that it is hurting the earnings of multinationals when translated back to dollars.
This has cut S&P 500 earnings forecasts for the year. And these days, everyone is a multinational, including the Diary of a Mad Hedge Fund Trader, where one third of our subscribers live abroad.
Another short-term factor is the complete collapse of the price of oil. Again, it happened so fast, and was so unexpected, that it too is having a sudden deleterious influence of broader S&P earnings.
Go no further than oil giant Chevron, which just announced a big drop in earnings and a massive cut in its capital spending budget for 2016.
The final nail in the Q4 coffin has been bank earnings, which all took big hits in trading revenues. Virtually all were taken short by the huge, one-way rally in bond prices in recent months and the collapse of interest rates.
This happens when panicky customers come in and lift the banks? inventories, and trading desks have to spend the rest of the day, week and month trying to get them back at a loss.
I have seen this happen too many times. This is why the industry always trades at such low multiples.
With no leadership from the biggest sectors of the market, financials and energy, and with the horsemen of technology and biotech vastly overbought, it doesn?t leave the nimble stock picker with too many choices.
The end result is a stock market that goes nowhere, but with a lot of volatility. Sound familiar?
Fortunately, there is a happy ending to this story. Eventually, all of the short-term factors will disappear. Oil prices and bond yields will go back up. The dollar will moderate. Corporate earnings growth will return to the 10% neighborhood. And stocks will reach new highs.
But it could take a while to digest all of this. This is a lot of red meat to take in all at one time. If the market grinds sideways in a 15% range all year, and then breaks out to the upside once again for a 5% annual gain, most investors would consider this a win.
Once again, index investors will beat the pants off of hedge fund managers, as they have for the past seven years.
In the meantime, I doubt the stock indexes will drop more than 6% % from here, with the (SPY) at $189, and we have already seen a 6% hair cut from last year?s peak.?
Knock a tenth off a 16.5 X forward earnings multiple with zero inflation, cheap energy, ultra low interest rates and hyper accelerating technology, and all of a sudden, stocks look pretty cheap again.
As the super sleuth, Sherlock Homes used to say, ?When you have eliminated the impossible, whatever remains, however improbable, must be the truth?.
It?s All Elementary